Israeli Bank Overdrafts Cost Consumers Thousands Annually
Maintaining an average overdraft of 18,000 shekels in a checking account can cost consumers approximately 2,378 shekels per year, equating to about 200 shekels monthly. This annual cost comprises 2,115 shekels in interest, calculated at a rate of Prime plus 7 percentage points, and an additional 250 shekels for a credit allocation fee. The Prime rate currently stands at 4.75%, derived from the Bank of Israel's rate of 3.25% plus a 1.5 percentage point margin, leading to an effective interest rate of 11.75% in this scenario. However, actual interest rates can vary significantly based on the customer's creditworthiness, ranging from lower rates for good customers to as high as 13%-15% annually for those deemed higher risk.
The credit allocation fee is charged quarterly at 0.25% of the credit line, which is set at 25,000 shekels in this example. This fee is debited at the beginning of each quarter based on the credit line's total amount, even if the account maintains a positive balance throughout the quarter. Some banks may waive this fee for private accounts, subject to negotiation, and customers who do not utilize their credit line still incur this charge every three months.
The article highlights how the effective interest rate increases as the overdraft amount decreases due to the fixed credit allocation fee. For instance, an average overdraft of 6,000 shekels incurs an annual cost of 955 shekels, representing 15.92% of the debt, while a 24,000 shekel overdraft costs 3,070 shekels, or 12.79%. This means the fixed fee constitutes a larger proportion of the total cost for smaller debts.
Negotiating the margin above the Prime rate is possible, with rates varying from approximately 5 percentage points for customers with good financial history to over 10 percentage points for those classified as high risk. The difference can amount to about 1,000 shekels annually on an 18,000 shekel debt. The total cost of overdrafts is often underestimated because banks present the charges as a single annual sum at the end of the quarter, making them less noticeable than smaller, more frequent charges.
As an alternative, taking out a loan to cover the overdraft is presented. An 18,000 shekel loan over 36 months at an 8.5% annual interest rate would accrue 2,456 shekels in interest over three years. In contrast, maintaining the same 18,000 shekel overdraft for three years would cost 7,134 shekels in interest and fees, with the principal debt remaining. The difference of 4,679 shekels illustrates the potential savings of opting for a structured loan.
The article also mentions that the interest on checking account balances is compounded quarterly, increasing the effective annual rate. A nominal rate of 11.75% compounded quarterly equates to 12.28% annually before fees. The effective rate, including all components and minor overdrafts, can reach 13.21% for an 18,000 shekel overdraft. It also advises consumers to assess their actual credit line needs rather than accepting the maximum approved limit.
